Investment Opportunities in Commercial Papers

FSDH
Research identifies investment opportunities in Commercial Papers (CPs). CPs
are unsecured money market instruments issued in the form of promissory notes
to raise shortterm funds, which companies use to finance their operations. They
are issued by large corporations with good credit ratings. CPs are issued in
tenors ranging between a minimum of 15 days and a maximum of 270 days.

FSDH
Research has observed a number of companies recently issuing CPs in the market.
The drop in the yields on Nigerian Treasury Bills (NTBs) will also drive the CP
issuance. In addition, the Monetary Policy Committee (MPC) of the Central Bank
of Nigeria (CBN) is encouraging large corporations to issue CPs. The yields on
CPs are usually higher than those on NTBs. FSDH Research notes, however, that
the risks inherent in investing in CPs are higher than the risks inherent in
investing in NTBs.

The
yields on the NTBs have dropped consistently over the last few months. The
average yield on the 364-Day NTB dropped to 12.99% in July 2018, compared with
22.80% in July 2017. The Securities and Exchange Commission (SEC) regulates the
CP market in Nigeria and protects investors’ interests to ensure an organised
market. Usually, the offer for subscription of CPs opens for a short period of
time – in most cases, one week.

The
issuing company determines the minimum subscription, which is usually
N5million, but may be lower. The CPs are typically issued at a discount to the
face value. This means that an investor will pay less than the amount on the
face of the investment note and will earn the full value at maturity.

The
interest on the investment is the difference between the face value and the
discounted amount the investor paid at the time of investment. Investment banks
or investment management companies regularly introduce available CPs into the
market to their clients when the offer is open for subscription. CPs are
relatively low-risk investments because of their short maturity period.

The
FMDQ OTC Securities Exchange provides a platform for trading in CPs in Nigeria.
Thus, CPs investments are relatively liquid as they can be traded in the
secondary market if investors wish to sell before maturity.